When close to half the companies in Hong Kong have price-to-earnings ratios (or “P/E’s”) above 11x, you may consider G.A. Holdings Limited (HKG:8126) as an attractive investment with its 7.3x P/E ratio. However, the P/E might be low for a reason and it requires further investigation to determine if it’s justified.
We’d have to say that with no tangible growth over the last year, G.A. Holdings’ earnings have been unimpressive. One possibility is that the P/E is low because investors think this benign earnings growth rate will likely underperform the broader market in the near future. If you like the company, you’d be hoping this isn’t the case so that you could potentially pick up some stock while it’s out of favour.
See our latest analysis for G.A. Holdings
What Are Growth Metrics Telling Us About The Low P/E?
There’s an inherent assumption that a company should underperform the market for P/E ratios like G.A. Holdings’ to be considered reasonable.
Retrospectively, the last year delivered virtually the same number to the company’s bottom line as the year before. The lack of growth did nothing to help the company’s aggregate three-year performance, which is an unsavory 68% drop in EPS. Therefore, it’s fair to say the earnings growth recently has been undesirable for the company.
Comparing that to the market, which is predicted to deliver 9.4% growth in the next 12 months, the company’s downward momentum based on recent medium-term earnings results is a sobering picture.
With this information, we are not surprised that G.A. Holdings is trading at a P/E lower than the market. However, we think shrinking earnings are unlikely to lead to a stable P/E over the longer term, which could set up shareholders for future disappointment. There’s potential for the P/E to fall to even lower levels if the company doesn’t improve its profitability.
The Final Word
While the price-to-earnings ratio shouldn’t be the defining factor in whether you buy a stock or not, it’s quite a capable barometer of earnings expectations.
We’ve established that G.A. Holdings maintains its low P/E on the weakness of its sliding earnings over the medium-term, as expected. At this stage investors feel the potential for an improvement in earnings isn’t great enough to justify a higher P/E ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
It is also worth noting that we have found 4 warning signs for G.A. Holdings (2 are a bit concerning!) that you need to take into consideration.
If P/E ratios interest you, you may wish to see this free collection of other companies that have grown earnings strongly and trade on P/E’s below 20x.
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